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Aggregate Demand
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Aggregate Demand
What is Aggregate Demand (AD)
Aggregate demand is the amount of goods demanded in all sectors of the economy
What is AD?
Macro vs Micro
Aggregate Demand Curve
Microeconomics Demand Curve
Comparison w/Microeconomics
Law of Demand
The Law of Demand still applies in aggregate demand situations
Law of Demand
DEMAND
PRICE
Components of Aggregate Demand
Components of AD
Aggregate demand is equal to:-
consumption + investment + government spending + net exports
This is also equivalent to GDP if we use the expenditure method of calculation
So, what does this mean? Well...
Consumption
Consumption
This is defined as the total amount spent on domestic goods or services by consumers.
Durable Goods
These are goods that consumers don't tend to buy often.
Durable
Non Durable Goods
They are goods that are used up over a short period of time
Non Durable
Investment
This is defined as the addition of capital stock of a country. There are two types of investment
Investment
Replacement Investments
This occurs when a firm spends money on capital in order to maintain the productivity of existing capital.
Replacement
Induced Investment
This occurs when firms spend money on capital in order to increase output when responding to higher demand.
Induced
Government Spending
Government spend on a wide variety of goods and services
The amount of government spending depends on policies
Government Spending
Net Exports
The net trading component of aggregate demand is export revenue minus import expenditure.
This is simplified as X-M.
Net Exports
Application
Use the equation AD = C + I + G + (X - M) in these real-world examples
Application
United Kingdom
FIND AGGREGATE DEMAND
Net Exports: –$150 billion
Consumer Demand: $2 trillion
Demand from Frims: $470 billion
Demand from Govt: $780 billion
Demand for Groceries: $100 billion
GDP/capita: $40,000
China
SOLVE FOR NET EXPORTS
GDP: $14.69 trillion
Household Consumption: $5.6 trillion
Consumption by Firms: $6.3 trillion
HDI: 0.761
Consumption by Government: $2.5 trillion
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The Aggregate Demand Curve
A rise in prices causes a decrease in aggregate demand
AD Curve
Case Study
We will now hand out a Cast Study.
Once you are done reading, we will discuss the answers.
Case Study
Changes in Govt. Spending
Why might governments change their spending behaviors?
Changes in Govt. Spending
Priorities
Government priorities may change based on the circumstances or to achieve certain goals
Priorities
Changes to the AD Curve
Effects of Govt. Spending on AD Graph
Government spending increases
Government spending decreases
Video
Changes in Net Exports
- A change in the level causes a change in net exports that moves the economy along its aggregate demand curve
- Net exports are the difference between export revenues and import expenditure over a given period of time
Net Exports = Value of total exports - Value of total imports
https://www.international.gc.ca/trade-commerce/economist-economiste/price-quantity_report-rapport_prix-volume.aspx?lang=eng
Changes in Net Exports
WHAT DOES IT MEAN IF THE NET EXPORTS ARE POSITIVE?
Change in Aggregate Demand
- A change in any of the components of aggregate demand will cause a shift in the demand curve
- Rising household wealth increases aggregate demand while a decline usually leads to lower aggregate demand
Changes in Consumption
Changes in income taxes
- As incomes rise, people have more money to spend on goods and services, so consumption increases
- A reduction in income tax levels will lead to an increase in disposable incomes and thus an increase in consumption and AD
Changes in Interest Rates
- When interest rates rise, businesses and consumers will cut back on spending.
- Some of the money that is used to buy durable goods comes from money that people borrow from the bank
– When people borrow money they must pay for the borrowed money by paying interest to the bank
The Changes:
What Causes Change In Consumption
Changes in Wealth
- DO NOT get confused between income and wealth. Income is the money people earn. Whereas, wealth is made up of assets that people own.
Changes in Investment
We will now look at the changes in Investment as this also affects aggregate demand
Changes in Investment
Changes in Interest Rates
In order to invest, firms need money.
These are affected by interest rates.
Therefore there is an inverse relationship between better interest rates and level of investment.
Interest Rates
Changes in Business Taxes
If a government increases taxes on business that would decrease the ‘post tax profit’
So, we would see a fall in aggregate demand.
Business Taxes
Technological Change
In order to keep up with changing technologies firms must spend on new technology
This increases aggregate demand
Technological Change
Changes in Business Confidence
If a business is very confident and expects consumer demand to rise
They wish to be ready to meet that demand they will increase their output and productivity.